Can IAG Sustain Its High ROE and Profitability Amid High Debt and Market Uncertainty?

The question of whether International Consolidated Airlines Group (LON:IAG) can maintain its impressive Return on Equity (ROE) of 96.25% as of September 2025, while navigating significant leverage and external risks, demands a nuanced analysis of its financial strategies and operational resilience. With a debt-to-equity ratio of 2.81, IAG's reliance on debt to amplify returns introduces inherent volatility, yet its robust EBITDA growth, strategic hedging, and disciplined capital management suggest a capacity to weather challenges. This article evaluates the sustainability of IAG's performance through the lens of its leverage, profitability, and risk mitigation efforts.

Financial Leverage and ROE: A Double-Edged Sword

IAG's high ROE is underpinned by aggressive leverage, with a debt-to-equity ratio of 2.81 as of 2025. While this level of debt amplifies returns for shareholders, it also heightens vulnerability to interest rate fluctuations and economic downturns. However, IAG's interest coverage ratio of 9.6 times-a measure of its ability to meet interest obligations-indicates strong operational cash flow. This is further supported by a net debt-to-EBITDA ratio of 0.87x, which suggests the company is not over-leveraged relative to its earnings.

The airline's capital structure also reflects strategic prudence. For instance, its net leverage of 0.8 times and gross leverage of 1.9 times as of Q3 2025 underscore a liquidity buffer that provides flexibility to navigate transatlantic route challenges and other operational headwinds. Additionally, IAG's solvency ratio of 138% and a capital available for deployment of $1.7 billion highlight its ability to fund growth initiatives without overreliance on external financing.

EBITDA Growth and Operational Discipline

IAG's adjusted EBITDA surged to €6.7 billion in 2024, up from €5.6 billion in 2023, driven by capacity management, fleet modernization, and cost discipline. This growth trajectory is critical for sustaining profitability, as EBITDA serves as a key metric for debt servicing and reinvestment. The company's recent €950 million share buyback program and an interim dividend of €0.048 per share further signal confidence in its cash flow generation and long-term value creation.

However, external risks loom large. Fuel prices, which account for up to 25% of IAG's operational expenses, remain a wildcard. While the airline has hedged a significant portion of its fuel costs for the next two years, prolonged volatility in Brent crude prices could erode margins. Regulatory challenges, such as French air traffic control strikes, also add operational uncertainty.

Risk Mitigation: Hedging, Diversification, and Strategic Alliances

IAG's proactive risk management strategies are pivotal to its sustainability. Its fuel hedging program has insulated the company from recent price spikes, securing lower costs amid a rally in Brent crude. Additionally, strategic equity stakes, such as a 20% holding in Air Europa, diversify its revenue streams and reduce debt burdens.

The airline's fleet modernization efforts- secured through aircraft deliveries from Boeing and Airbus between 2023 and 2028-are expected to enhance fuel efficiency and align with climate commitments. These investments not only reduce long-term operating costs but also position IAG to meet evolving regulatory standards.

External Risks: Climate, AI, and Regulatory Uncertainty

Beyond operational challenges, IAG faces broader macroeconomic and geopolitical risks. Climate change, for instance, poses physical and transition risks, particularly for insurance-linked liabilities. While this is more pertinent to Insurance Australia Group (IAG), the airline's exposure to weather-related disruptions-such as flight cancellations due to extreme weather-cannot be ignored.

Technological disruption, particularly in AI-driven risk assessment and pricing models, also presents dual-edged opportunities. While AI could optimize IAG's operational efficiency, it necessitates significant investment in cybersecurity and ethical frameworks. Regulatory and political uncertainties, especially in a post-election environment, further complicate pricing strategies and profitability.

Conclusion: Balancing Leverage and Resilience

IAG's ability to sustain its high ROE hinges on its capacity to balance aggressive leverage with disciplined risk management. Its strong EBITDA growth, robust interest coverage, and proactive hedging strategies provide a solid foundation. However, external risks-ranging from fuel price volatility to regulatory shifts-demand continuous adaptation.

For investors, the key takeaway is that IAG's financial model is resilient but not impervious. The airline's strategic focus on fleet modernization, capital efficiency, and hedging mitigates many risks, yet its high debt levels necessitate vigilance. If IAG can maintain its operational discipline while navigating macroeconomic headwinds, its ROE and profitability are likely to remain attractive. However, any miscalculation in debt management or risk mitigation could amplify vulnerabilities in a downturn.